EI-FACT SHEET 2015-01 1
The current electricity market design in Europe
Up to three decades ago, the electricity sector in the European published by the power exchange as reference price.
Union was organized as a regulated monopoly. In each country, • In organized over-the-counter (OTC) trading, market
one or more vertically integrated companies were responsible participants submit generation and demand bids to a market
for generation, transmission, distribution and supply of electricity. platform which is cleared continuously; one market player can
By means of three legislative packages (1996, 2003, 2009), the bilaterally accept the bid of another market player, resulting in
European Union gradually opened this sector for competition, different prices for each trade.
aiming at an internal European electricity market. The European
Directives are being translated by the Member States in national This factsheet focusses on the time dimension of the current
legislation. The envisaged integrated European market is not yet market design. It discusses the different electricity markets and
reached; the European electricity sector is still subject to their sequence in time. Aspects related to market coupling are
continuous change.1 only dealt with to a limited extent.
This factsheet gives a succinct overview of the current European Overview of the different consecutive
electricity market, with focus on its implementation in Belgium. electricity markets
The issue Electricity is a commodity with the property that generation has
to equal consumption (plus grid losses) on an instantaneous basis.
As a general rule, most of the electricity industry in Europe is Otherwise the grid frequency starts deviating from its reference
vertically unbundled.2 Transmission (almost totally) and value, which can result in a system collapse. The design of
distribution (in many member states) of electric power are electricity markets is adapted to deal with this particular property.
regulated natural monopolies. Electricity generators and electricity Different types of electricity markets are arranged in a sequential
suppliers operate in a liberalized market environment.3 order, starting years before the actual delivery and ending after
Generators compete in the wholesale electricity market to sell the actual delivery. The following figure gives an overview of the
electricity to large industrial consumers and suppliers; suppliers temporal ordering of the different electricity markets.
compete in the retail electricity market to sell electricity to the final
consumer. This factsheet focuses on wholesale electricity markets.
Currently, the electricity market in Europe is (mainly) an
energy-only market, meaning that generators are remunerated
for generated electric energy. If generators were remunerated
for the generation capacity they have available in the market, one
would speak of a capacity market.4 This factsheet deals with the
energy-only market.
Electricity can be traded on different types of wholesale markets:
• In a power exchange or multilateral trading platform, market Balance responsibility
participants submit generation and demand bids. The market
is cleared once per predefined time period and a single The final responsibility for maintaining the instantaneous
market price is determined.5 generation-consumption balance lies with the Transmission
• In bilateral over-the-counter (OTC) trading, a generator and System Operator (TSO), i.e., Elia in Belgium. Before the actual
consumer agree on a trade contract by directly interact- delivery, the balance responsibility is passed on to Balance
ing with each other. OTC trading can take the market price Responsible Parties (BRPs). A BRP is a private legal entity that
1
The reader is referred to the European Network Codes for the takes up the responsibility to compose a balanced portfolio.
most recent evolutions in the European electricity market design The portfolio of a BRP may consist of own generation, own
([Link] consumption,and/or electricity traded with other BRPs.A Balance
2
EU regulation can allow distribution companies with less than 100,000 Responsible Party can represent one or more electricity
customers to remain vertically integrated. Typical examples are the
generators, suppliers and/or industrial consumers. However, the
German “Stadtwerke”.
3
A single company is allowed to both generate and supply electricity. physical process of generating and consuming electricity is still
4
See KU Leuven EI factsheet on “Capacity Mechanisms”. managed by respectively generators and consumers. As a rule,
5
Common “market clearing” refers to the situation when the curve made a BRP is merely an administrative entity intrinsic to the market
up of generation bids intersects with the curve of demand bids, which design, needed to balance generation and consumption from
then determines the quantity to be generated (and consumed) and the
generators, suppliers and consumers.
corresponding price.
KU Leuven Energy Institute EI Fact sheet: The current electricity market design in Europe
EI-FACT SHEET 2015-01 2
1 Forward and future market The Belpex market zone is implicitly coupled with other market
zones via the Belpex DAM. In implicit cross-border allocation,
The forward and future markets run from years before up to the a buyer or seller of electricity has automatically access to
day before delivery. Forwards and futures are contracts to deliver/ transmission capacity by submitting orders to the power
consume a certain amount of electricity at a certain time in the exchange. Energy and transmission capacity are thus traded
future for a price agreed upon today. Futures are standardized together. Today, the Belgian day-ahead market (Belpex DAM)
contracts that can be further traded on power exchanges. is coupled with the Netherlands, Luxembourg, Great Britain,
Forwards are mainly traded bilaterally over-the-counter and are Germany/Austria, France, Norway, Sweden, Finland, Denmark,
not standardized, giving more flexibility to the involved parties; Estonia, Poland, Portugal, Spain, Latvia, Estonia and Lithuania.
they are usually not further traded. Belgian power futures for
base load are traded on the ICE Endex and the European Energy At the end of the day-ahead market, each BRP submits a balanced
Exchange (EEX). portfolio to the TSO (i.e., so-called nominations). These
nominations give the planned generation or consumption for
Electricity generators sell electricity on forward and future markets every unit of the BRP. The nominations differ from the Belpex
to ensure future sales and reduce their vulnerability to possible DAM market clearing in three aspects; nominations contain all
electricity price decreases. Analogously, large (industrial) electricity planned generation or consumption (only part of it is traded
consumers might buy electricity on forward and future markets on the Belpex), nominations are made on plant level whereas
to secure their future electricity consumption at upfront known electricity is traded on BRP level on Belpex DAM, and
costs and reduce their vulnerability to possible electricity price nominations have a quarter-hourly time resolution whereas
increases. This risk-reducing behavior is referred to as hedging. Belpex DAM has an hourly time resolution. In Belgium, a BRP has
to submit its day-ahead portfolio to Elia by 2 p.m. day-ahead.
In forward and future markets, electricity can be traded between
different market zones or within a market zone.6 The allocation 3 Intra-day market
of the transmission capacity between two market zones in
forward and future markets happens explicitly. In such an explicit In the intra-day market, electricity is traded on the delivery day
cross-border allocation, transmission capacity is traded apart itself. The intra-day market enables market participants to correct
from electric energy. This implies that market players first buy the for shifts in their day-ahead nominations due to better wind
right to use the transmission capacity between two market zones forecasts, unexpected power plant outages, etc.
before buying or selling electricity in another zone. The auctioning
of cross-border capacity in Central Western Europe is organized Electricity can be traded intra-day on the Belpex Continuous
by [Link]. With respect to trading within a market zone, it Intra-day Market (CIM). The Belpex CIM is an organized over-the-
is assumed that intra-zonal trading is never constrained by the counter market which is cleared continuously. In 2013, a total of
transmission capacities; no transmission capacities are taken into about 0.6 TWh of electricity was traded on the Belpex CIM (1.5%
account when trading within one market zone. of the Elia grid load).8 The Belpex CIM is coupled implicitly with
the intra-day market in the Netherlands and explicitly with the
2 Day-ahead market French intra-day market.
In the day-ahead market, electricity is traded one day before After clearing of the intra-day market, each BRP can submit
actual delivery. The day-ahead market is of major importance as intra-day nominations to Elia on a quarter-hourly basis, from 3.30
the market zone has to be in balance at the end of the day-ahead p.m. day-ahead until 2 p.m. the day after delivery.9 The intra-day
market (i.e., scheduled generation in the market zone equals nominations are added to the day-ahead nominations of the BRP.
forecasted demand in the market zone plus net export to other The BRP’s portfolio can be in imbalance after the intra-day market,
market zones).7 in contrast to the day-ahead market where a balanced portfolio
is required. These portfolio imbalances are dealt with in the
Electricity can be traded day-ahead bilaterally (over-the-counter balancing market.
trading) or on the day-ahead power exchange. The day-ahead
power exchange in the Belgian market zone is the Belpex Day-
Ahead Market (DAM). Participants can submit their orders until
12 a.m. day-ahead. In 2013, the average Belpex DAM price was
47.45 €/MWh and the total traded volume 17.1 TWh (21% of
the Elia grid load).
8
The amount of electricity traded on the Belpex CIM may not be added
6
A market zone mostly coincides with a Member State, however exceptions to the amount of electricity traded on the Belpex DAM. Part of the elec-
exist (e.g., Germany and Austria are one market zone). tricity traded on the Belpex CIM was already traded on the Belpex DAM.
7
Net export is the difference between the sum of all exports and the
9
The rationale behind prolonging the intra-day market until the day after
sum of all imports. Net export is negative if the sum of all imports is larger delivery is to give market players additional time to close financial trans-
than the sum of all exports. actions.
KU Leuven Energy Institute EI Fact sheet: The current electricity market design in Europe
EI-FACT SHEET 2015-01 3
4 Balancing market • New types of reserves. Elia is opening up the reserve market
for new reserve providers. Two recently launched reserve
The individual BRPs might face a real-time imbalance. The BRP’s types are R3 Dynamic Profile (R3 DP) and R3 Aggregated
imbalance is the net quarter-hourly difference between the BRP’s Power Plant (R3 APP). R3 refers to the fact that these
total injections and offtakes. The total imbalance in the control reserves belong to the broader category of “tertiary
area is the net sum of all BRP imbalances.10 The TSO will maintain reserves”, but are different from RR in that R3 DP and
the system balance by activating reserves. The amount of reserves R3 APP involve distributed energy resources (distributed
activated by Elia is referred to as the Net Regulation Volume generation, flexible load, small-scale storage), whereas RR
(NRV). A positive NRV corresponds to upward regulation (i.e., are delivered by large centralized generation units and
increase in grid injections or decrease in grid off-takes) and a interruptible consumers.
negative NRV corresponds to downward regulation (i.e., decrease
in grid injections or increase in grid off-takes). At the time of writing, reserve procurement is mainly organized
at the national level (except for FCR, where a European tender is
Balancing markets can be split into a procurement side (i.e., organized by Elia). In 2012, the TSOs from Belgium, Denmark-
procurement and activation of reserves by the TSO) and a West, the Netherlands, Switzerland and Czech Republic launched
settlement side (i.e., financial settlement of the BRP imbalances by a trial period of the International Grid Control Cooperation
the TSO). (IGCC), which enables TSOs to exchange opposing imbalances.
Procurement and activation of reserves Settlement of imbalances
This part of the balancing market can also be referred to as the Elia imposes a tariff to each BRP with an imbalanced portfolio.
reserve market. Although the reserve market is not part of the This imbalance settlement takes place after the actual delivery.
pure energy-only market, since reserves deliver both energy The imbalance tariffs are based on two prices:
services (i.e., generating electric energy when activated) and
capacity services (i.e., reserving generation capacity), it is • Marginal Incremental Price (MIP): the highest price paid by
nevertheless instructive to discuss them. Elia is the single buyer of Elia for upward activations for a given quar ter-hour.
reserves and contracts different types of reserves: • Marginal Decremental Price (MDP): the lowest price
received by Elia for downward activations for a given
• Frequency containment reserves (FCR, formerly called “primary quarter-hour.
reserves”) are used to stabilize the frequency within the
time-frame of seconds by means of automatic controlled and In case of a positive NRV, Elia buys upward regulation and pays
locally activated reserves. The Belgian control area is the reserve provider for this extra generation or load shedding.
containing about 90 MW of FCR. The most expensive unit of upward regulation sets the MIP. In
• Frequency restoration reserves (FRR, formerly called “secondary case of a negative NRV, Elia needs downward regulation and
reserves”) are used to restore the system balance. Frequency receives a payment from the reserve providers who are willing
restoration reserves are active in the range of seconds up to to reduce their output (and avoid generation costs) or increase
15 minutes and are controlled automatically and activated their consumption. In case of a large negative NRV, it might be
centrally. In 2012, Elia contracted 140 MW of FRR on a yearly possible that Elia has to pay downward regulation providers to
basis. Besides the yearly contracts, non-contracted FRR can reduce their output (e.g., generators want to be paid due to
be offered in the reserve market day-ahead as free bids. high shut-down costs).11 The last unit of downward regulation
• Replacement reserves (RR, formerly called “tertiary reserves”) sets the MDP.
are used to restore the system balance when frequency
restoration reserves are not able to do so (i.e., in case of If net upward regulation is needed in the Belgian control area
major imbalances) and to allow the FRR units to return to (positive NRV), Elia pays MIP to BRPs with a positive imbalance
their pre-imbalance status allowing them to be ready for and receives MIP+α2 from BRPs with a negative imbalance (see
the next short-term imbalance intervention. Replacement Table 1). If net downward regulation is needed (negative NRV),
reserves are active in the range of minutes to hours, Elia pays MDP-α1 to the BRPs with a positive imbalance and
controlled manually and activated locally. If the replacement receives MDP from the BRPs with a negative imbalance (the
reserve is provided by an interruptible consumer, one speaks money flows are reversed for a negative MDP).
of interruptible demand. In 2012, Elia contracted 400 MW of
RR (generation) and 261 MW of interruptible demand. In 2012, 2.93 TWh of upward regulation and 2.45 TWh
of downward regulation was activated (respectively 3.6%
and 3.0% of the Elia grid load). The 2012 average negative
imbalance price was 53.96 €/MWh and the average positive
imbalance price 51.75 €/MWh.
10
A control area mostly coincides with a market zone, but exceptions ex-
ist (e.g., Germany and Austria are one market zone consisting of different
control areas). 11
See the KU Leuven EI factsheet on “Negative Market Prices”.
KU Leuven Energy Institute EI Fact sheet: The current electricity market design in Europe
EI-FACT SHEET 2015-01 4
Net regulation volume in Belgian control area (NRV)
Negative Positive
(downward regulation needed) (upward regulation needed)
BRP imbalance Positive MDP – α1 MIP
(surplus generation or shortage TSO pays BRP (mostly) TSO pays BRP
consumption)
Negative MDP MIP + α2
(shortage generation or surplus BRP pays TSO (mostly) BRP pays TSO
consumption)
Table 1. Overview of imbalance settlement. α1 and α2 are zero if the system imbalance is smaller than 140 MW and become nonzero for
larger imbalances.
Terminology issues
Certain commonly used terminology in commodity markets cannot simply be used for electricity markets.
Spot market. In general, commodities are traded in spot markets for immediate delivery. There is no perfect equivalent of a spot
market in the current electricity market. In Europe, day-ahead power exchanges are sometimes referred to as electricity spot
markets, but one should avoid this terminology.
Forward/futures market. In general, commodities are traded on future/forward markets for delivery in the future. Strictly speaking,
day-ahead markets, intra-day markets and reserve markets are forward/future markets as they deal with electricity and reserves for
future use. However, the term forward/future market is principally used in the context of electricity markets to denote markets that
take place before the day-ahead market.
KU LEUVEN ENERGY INSTITUTE
Celestijnenlaan 300 box 2421
B3001 Heverlee
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KU Leuven Energy Institute EI Fact sheet: The current electricity market design in Europe
